Markets are ‘lofty but not nutty' says Oaktree's Marks
Oaktree's founder Howard Marks says while Wall Street's rebound back towards its record high was 'troubling', equity valuations were not yet at a level that would suggest a bubble was starting to emerge.
Marks, speaking from Spain via webcast at the Morgan Stanley conference in Sydney, said stock prices were 'lofty but not nutty', before adding that his $US200 billion ($307 billion) firm saw better opportunities in credit markets, given the uncertain economic backdrop.
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Marks doesn't look at prices and valuations to determine whether we are in trouble territory, he looks for the 'psychological excess that characterises bubbles'. Ahead of the GFC, it was the unmistakable sign of carefree investors oblivious to any risk. 'When other people become carefree, we worry,' he said. Could it be that Trump's instability has stopped investors from making this leap? In any case, you don't have to look too hard for what others regard as red flags, as global markets rebounded despite the assured economic impact of the uncertainty. The valuation of stocks is getting stretched to breaking point again despite the World Bank warning of the certainty of global growth slowing to its lowest levels since the 1960s due to the upheaval of 'a substantial rise in trade barriers and the pervasive effects of an uncertain global policy environment'. Prominent billionaire and US investor Jeffrey Gundlach compared the current investment environment to the lead-up to the dot-com bust in 2000, and the global financial crisis in 2008 and says a 'reckoning is coming' for the United States' unsustainable debt, too, if the US passes Trump's signature tax bill. 'We have a tremendous paradigm shift where money is not coming into the United States, and gold is suddenly the flight to quality asset,' Gundlach told Bloomberg. We are now in an environment where gold is 'no longer for lunatic survivalists', he added. This week, one of Australia's most eminent market gurus, Gerard Minack, also appeared at the Morgan Stanley conference and made a strong argument for why US exceptionalism is coming to an end. The big issue for Minack is the exuberance around AI – which has driven the Magnificent Seven tech stocks to an extraordinarily dominant position over global sharemarkets. Each of these seven stocks, on average, is now worth more than the entire ASX 200. 'I think US exceptionalism is going to peak this year,' he told a standing room audience. Like Gundelach, he thinks the US faces a day of reckoning over its government's need for the rest of the world to fund its multi-trillion dollar deficits, despite Trump trying to 'piss them off'. But it is AI stocks that, he thinks, will bring things to a head for investors. Quite simply, they don't have the magic qualities that drove digital platforms like Meta's Facebook to such extraordinary valuations. 'I think the moment it's going to roll over is when investors start to say, show me the money. Where are the returns on these AI investments?' Loading The issue is not whether AI will be transformative or not, it's about what money these companies can make offering the AI services that have driven the recent frenzy. For the likes of Meta, Google's Alphabet, Apple, Amazon and Microsoft, their businesses have three key features: Large upfront costs which new entrants would find hard to match; low marginal costs of servicing additional users; and lastly, the network effect – the more users they have, the more useful they are. It makes them the top dog in a 'winner takes all' market, and they generate returns to match. According to Minack, what we've seen from AI to date suggests it has none of these qualities. DeepSeek came from nowhere to rattle the US giants. Each new user and their use of AI is costly in computing and energy use, and there is zero network effect. 'My sense is that the business of providing AI services will be much lower margin than what's in current share prices. So ultimately, this is going to fade, I suspect, in the next year or two,' Minack says. But even a renowned market bear like Minack is not calling a top – not when the Magnificent Seven could double in price and just match the price to earnings valuations of the dot-com era. If the post-Liberation Day investment market has taught us anything, it's that anything is possible – for a while at least. As for Australia, Minack's stagnation nation tag is a swipe at both the government and a business scene that survives on too little investment due to three issues. Our market is built on oligopolies that don't need to invest to compete; high immigration also ensures there's enough labour to stifle labour-saving investment; and Australia's franked dividend policy adds further pressure for cash pay-outs to investors, rather than investment. 'From a shareholder perspective, it's the lowest tax profits in the world. So get rid of franking credits and just lower the statutory rate and hopefully blunt that incentive for those massive payout ratios. And then look at industry reform. We do have quite cosseted sectors that lack competition,' he says.
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Marks doesn't look at prices and valuations to determine whether we are in trouble territory, he looks for the 'psychological excess that characterises bubbles'. Ahead of the GFC, it was the unmistakable sign of carefree investors oblivious to any risk. 'When other people become carefree, we worry,' he said. Could it be that Trump's instability has stopped investors from making this leap? In any case, you don't have to look too hard for what others regard as red flags, as global markets rebounded despite the assured economic impact of the uncertainty. The valuation of stocks is getting stretched to breaking point again despite the World Bank warning of the certainty of global growth slowing to its lowest levels since the 1960s due to the upheaval of 'a substantial rise in trade barriers and the pervasive effects of an uncertain global policy environment'. Prominent billionaire and US investor Jeffrey Gundlach compared the current investment environment to the lead-up to the dot-com bust in 2000, and the global financial crisis in 2008 and says a 'reckoning is coming' for the United States' unsustainable debt, too, if the US passes Trump's signature tax bill. 'We have a tremendous paradigm shift where money is not coming into the United States, and gold is suddenly the flight to quality asset,' Gundlach told Bloomberg. We are now in an environment where gold is 'no longer for lunatic survivalists', he added. This week, one of Australia's most eminent market gurus, Gerard Minack, also appeared at the Morgan Stanley conference and made a strong argument for why US exceptionalism is coming to an end. The big issue for Minack is the exuberance around AI – which has driven the Magnificent Seven tech stocks to an extraordinarily dominant position over global sharemarkets. Each of these seven stocks, on average, is now worth more than the entire ASX 200. 'I think US exceptionalism is going to peak this year,' he told a standing room audience. Like Gundelach, he thinks the US faces a day of reckoning over its government's need for the rest of the world to fund its multi-trillion dollar deficits, despite Trump trying to 'piss them off'. But it is AI stocks that, he thinks, will bring things to a head for investors. Quite simply, they don't have the magic qualities that drove digital platforms like Meta's Facebook to such extraordinary valuations. 'I think the moment it's going to roll over is when investors start to say, show me the money. Where are the returns on these AI investments?' Loading The issue is not whether AI will be transformative or not, it's about what money these companies can make offering the AI services that have driven the recent frenzy. For the likes of Meta, Google's Alphabet, Apple, Amazon and Microsoft, their businesses have three key features: Large upfront costs which new entrants would find hard to match; low marginal costs of servicing additional users; and lastly, the network effect – the more users they have, the more useful they are. It makes them the top dog in a 'winner takes all' market, and they generate returns to match. According to Minack, what we've seen from AI to date suggests it has none of these qualities. DeepSeek came from nowhere to rattle the US giants. Each new user and their use of AI is costly in computing and energy use, and there is zero network effect. 'My sense is that the business of providing AI services will be much lower margin than what's in current share prices. So ultimately, this is going to fade, I suspect, in the next year or two,' Minack says. But even a renowned market bear like Minack is not calling a top – not when the Magnificent Seven could double in price and just match the price to earnings valuations of the dot-com era. If the post-Liberation Day investment market has taught us anything, it's that anything is possible – for a while at least. As for Australia, Minack's stagnation nation tag is a swipe at both the government and a business scene that survives on too little investment due to three issues. Our market is built on oligopolies that don't need to invest to compete; high immigration also ensures there's enough labour to stifle labour-saving investment; and Australia's franked dividend policy adds further pressure for cash pay-outs to investors, rather than investment. 'From a shareholder perspective, it's the lowest tax profits in the world. So get rid of franking credits and just lower the statutory rate and hopefully blunt that incentive for those massive payout ratios. And then look at industry reform. We do have quite cosseted sectors that lack competition,' he says.
